Economics in one lesson PDF

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ECONOMICS IN ONE LESSON by Henry Hazlitt

Nobel Laureate in Economics, F.A. Hayek said in 1974 about Hazlitt‟s book: “It is a brilliant performance. It says precisely the things which need most saying and says them with rare courage and integrity. I know of no other modern book from which the intelligent layman can learn so much about the basic truths of economics in so short a time.” (Back cover) “This book is an analysis of economic fallacies that are at last so prevalent that they have almost become a new orthodoxy....its effort is to show that many of the ideas which now pass for brilliant innovations and advances are in fact mere revivals of ancient errors, and a further proof of the dictum that those who are ignorant of the past are condemned to repeat it.” (pp. 9-10) “As Morris R. Cohen has remarked: „The notion that we can dismiss the views of all previous thinkers surely leaves no basis for the hope that our own work will prove of any value to others.‟” (interior quote: Reason and Nature (1931), p.x.; Hazlitt, p.10) “It is the beliefs which politically influential groups hold and which governments act upon that we are interested in here, not the historical origins of those beliefs....Fallacies, when they have reached the popular stage, become anonymous anyway.” (p.11) The Lesson: “Economics is haunted by more fallacies than any other study known to man. This is no accident.” (p. 15) “While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case.” (p. 15) “[There] is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences. In this lies the whole difference between good economics and bad.” (pp. 15-16) “Doesn‟t everybody know, in his personal life, that there are all sorts of indulgences delightful at the moment but disastrous in the end?....Yet when we enter the field of public economics, these elementary truths are ignored. There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way to economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: „In the long run we are

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all dead.‟ And such shallow wisecracks pass as devastating epigrams and the ripest wisdom.... Today is already the tomorrow which the bad economist yesterday urged us to ignore.” (pp. 16-17) “[T]he whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” (p.17) “[Bad economists] overlook the woods in their precise and minute examination of particular trees. Their methods and conclusions are often profoundly reactionary.” (p. 18) “[B]ad economists present their errors to the public better than the good economists present their truths....The reason is that the demagogues and bad economists are presenting half-truths. They are speaking only of the immediate effect of a proposed policy or its effect upon a single group. As far as they go they may often be right. In these cases the answer consists in showing that the proposed policy would also have longer and less desirable effects, or that it could benefit one group only at the expense of all other groups. The answer consists in supplementing and correcting the half-truth with the other half. But to consider all the chief effects of a proposed course on everybody often requires a long, complicated, and dull chain of reasoning. Most of the audience finds this chain of reasoning difficult to follow and soon becomes bored and inattentive. The bad economists rationalize this intellectual debility and laziness by assuring the audience that it need not even attempt to follow the reasoning or judge it on its merits because it is only „classicism‟ of „laissez faire‟ or „capitalist apologetics‟ or whatever other term of abuse may happen to strike them as effective.” (pp. 18-19) The Broken Window: “A young hoodlum...heaves a brick through the window of a baker‟s shop....A crowd gathers....After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind...the baker that, after all, the misfortune has its bright side. It will make business for some glazier....After all, if windows were never broken, what would happen to the glass business? Then of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor....But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury)....The glazier‟s gain of business, in short, is merely the tailor‟s loss of business. No new „employment‟ has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the

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eye.” (pp. 23-24) The Blessings of Destruction: “So we have finished with the broken window. An elementary fallacy. Anybody, one would think, would be able to avoid it after a few moment‟s thought. Yet the broken-window fallacy, under a hundred disguises, is the most persistent in the history of economics.” (pp. 23-25) “[D]emand and supply are merely two sides of the same coin....the farmers‟ supply of wheat constitutes their demand for automobiles and other goods....This fundamental fact...is obscured...through such complications as wage payments and the indirect form in which virtually all modern exchanges are made through the medium of money....Mere inflation -- that is, the mere issuance of more money, with the consequence of higher wages and prices -- may look like the creation of more demand. But in terms of the actual production and exchange of real things it is not.” (pp.28-9) “[W]ar destroys accumulated capital....the basic truth [is] that the wanton destruction of anything of real value is always a net loss.” (p.30) Public Works Mean Taxes: “There is no more persistent and influential faith in the world today than the faith in government spending. Everywhere government spending is presented as a panacea for all our economic ills....An enormous literature is based on this fallacy, and, as so often happens with doctrines of this sort, it has become part of an intricate network of fallacies that mutually support each other....Everything we get, outside of the free gifts of nature, must in some way be paid for. The world is full of so-called economists who in turn are full of schemes for getting something for nothing. They tell us that the government can spend and spend without taxing at all; that it can continue to pile up debt without ever paying it off, because „we owe it to ourselves.‟...such pleasant dreams in the past have always been shattered by national insolvency or a runaway inflation....either immediately or ultimately every dollar of government spending must be raised through a dollar of taxation. Once we look at the matter in this way, the supposed miracles of government spending will appear in another light....With...public works, necessary for their own sake, and defended on that ground alone, I am not here concerned. I am here concerned with public works considered as a means of „providing employment‟ or of adding wealth to the community that it would not have otherwise have had.” (pp. 31-32) [Consider an example during the Great depression by the WPA in Sarasota Florida. This was a burgeoning citing tending towards a playground for the rich. For example, a rich Chicago heiress had bought about a thousand acres on the waterfront. There was a great land speculation boom. Ringling (of circus fame) was building his mansion there, etc. Yet during this time the WPA built a public auditorium and a casino – the Lido! Why here and why a gambling casino? Was this really a proper use of federal funds or was it rather just a glaring example of Albert Nock‟s contention that the state is simply an anti-social instrument of exploitation benefiting one group at the expense of everyone else? (The information came from a History Channel broadcast on 3/9/96)]

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“If the bridge costs $10 million the taxpayers will lose $10 million. They will have that much taken away from them which they would otherwise have spent on the things they needed most. Therefore, for every public job created by the bridge project a private job has been destroyed somewhere else....at best there has been a diversion of jobs....More bridge builders; fewer automobile workers, television technicians, clothing workers, farmers....What has happened is merely that one thing has been created instead of others.” (pp. 33-34) [But public works have great visibility which makes people not question their propriety -- after all they can drive over the bridge themselves. By contrast, people can‟t see the items sacrificed in the process because first, they are not visible having never come into existence and second, they are too indirect and it is hard to follow all of their myriad paths. In response to this Hazlitt says:] “As a character in Bernard Shaw‟s Saint Joan replies when told of the theory of Pythagoras that the earth is round and revolves around the sun: „What an utter fool! Couldn‟t he use his eyes?‟” (p. 35) [So who really was the fool?] [Due to the inefficiencies involved] “it is highly improbable that the projects thought up by the bureaucrats will provide the same net addition to wealth and welfare, per dollar expended, as would have been provided by the taxpayers themselves, if they had been individually permitted to buy or have made what they themselves wanted, instead of being forced to surrender part of their earnings to the state.” (p. 36) Taxes Discourage Production: “The government spenders create the very problem of unemployment that they profess to solve....the larger the percentage of the national income taken by taxes the greater the deterrent to private production and employment.” (pp. 38-39) “Government „encouragement‟ to business is sometimes as much to be feared as government hostility.” (p. 40) Credit Diverts Production: “All credit is debt. Proposals for an increased volume of credit, therefore, are merely another name for proposals for an increased burden of debt. They would seem considerably less inviting if they were habitually referred to by the second name instead of by the first.” (p. 41)

Government lending: “When people risk their own funds they are usually careful in their investigations to determine the adequacy of the assets pledged and the business acumen and honesty of the borrower. If the government operated by the same strict standards, there would be no good argument for its entering the field at all....The whole argument for its entering the lending business, in fact, is that it will make loans to people who could not get them from private lenders. This is only another way of saying that the government lenders will take risks with other people‟s money (the

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taxpayers‟) that private lenders will not take with their own money.” (p. 42) “[W]hat is really being lent is not money, which is merely the medium of exchange, but capital....What is really being lent, say, is the farm or the tractor itself....The farm or tractor that is lent to A cannot be lent to B. The real question is, therefore, whether A or B shall get the farm. This brings us to the respective merits of A and B....There is a strange idea abroad, held by all monetary cranks, that credit is something a banker gives to a man. Credit, on the contrary, is something a man already has. He has it, perhaps, because he already has marketable assets of greater cash value than the loan for which he is asking. Or he has it because his character and past record have earned it. He brings it into the bank with him. That is why the banker makes him the loan. The banker is not giving something for nothing. He feels assured of repayment. He is merely exchanging a more liquid form of asset or credit for a less liquid form....But the government goes into the lending business in a charitable frame of mind because, as we say, it is worried about B. B cannot get a mortgage or other loans from private lenders because he does not have credit with them....Perhaps in an individual case it may work out all right. But it is obvious that in general the people selected by these government standards will be poorer risks than the people selected by private standards....There will be a much higher percentage of failures among them. They will be less efficient. More resources will be wasted by them. Yet the recipients of government credit will get their farms and tractors at the expense of those who otherwise would have been the recipients of private credit. Because B has a farm, A will be deprived of a farm. A may be squeezed out either because interest rates have gone up as a result of the government operations, or because farm prices have been forced up as a result of them, or because there is no other farm to be had in his neighborhood. In any case, the net result of government credit has not been to increase the amount of wealth produced by the community but to reduce it, because the available real capital (consisting of actual farms, tractors, etc.) has been placed in the hands of the less efficient borrowers rather than in the hands of the more efficient and trustworthy.” (pp. 43-44) “The proposal is frequently made that the government ought to assume the risks that are „too great for private industry.‟ This means that bureaucrats should be permitted to take risks with the taxpayers‟ money that no one is willing to take with his own. Such a policy....would increase the demand for socialism; for, it would properly be asked, if the government is going to bear the risks, why should it not also get the profits?” (p. 45) “[T]he amount of real capital at any moment (as distinguished from monetary tokens run off on a printing press) is limited.” (p. 45) “The private lenders, moreover, are selected by a cruel market test....a process of survival of the fittest. The government lender, on the other hand, are either those who have passed civil service examinations, and know how to answer hypothetical questions hypothetically, or they are those who can give the most plausible reasons for making loans and the most plausible explanations of why it wasn‟t their fault that the loans failed. But the net result remains; private loans will utilize existing resources and capital far better than government loans....Government loans, in short, as compared with private loans, will reduce production, not increase it.” (p. 46) “The government never lends or gives anything to business that it does not take away from business. One often hears New Dealers and other statists boast about the way government

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„bailed business out‟ with the Reconstruction Finance Corporation, the Home Owners Loan Corporation and other government agencies in 1932 and later. But the government can give no financial help to business that it does not first or finally take from business. The government‟s funds all come from taxes....When the government makes loans or subsidies to business, what it does is to tax successful private business in order to support unsuccessful private business.” (pp. 47-8) [President Hoover raised the top marginal tax bracket from 25% to 63% and Franklin D. Roosevelt raised it to 79%, then 81%, then 88% and finally, all the way up to 94%. One can only wonder how much business activity was discouraged, and even destroyed, with such exorbitant rates of taxation.] The Curse of Machinery: “Among the most viable of all economic delusions is the belief that machines on net balance create unemployment. Destroyed a thousand times, it has risen a thousand times out of its own ashes as hardy and vigorous as ever. Whenever there is long continued mass unemployment, machines get the blame anew. This fallacy is still the basis of many labor union practices. The public tolerates these practices because it either believes at bottom that the unions are right, or is too confused to see just why they are wrong.” (p. 49) [He gives examples of the stocking industry rioting over the invention and introduction of stocking frames to make the work go faster. And the invention of the cotton-spinning machine causing concern among spinners who used spinning wheels. In both cases, over time, industry employment went up not down.] [Many people during the depression blamed things on machines. Fearing machinery, he gives many examples of ridiculous union featherbedding and make-work rules.] “By 1961 there was no sign that the fallacy had died. Not only union leaders but government officials talked solemnly of „automation‟ as a major cause of unemployment. Automation was discussed as if it were something entirely new in the world.” (p. 53) “If it were indeed true that the introduction of labor-saving machinery is a cause of constantly mounting unemployment and misery, the logical conclusion to be drawn would be revolutionary....Not only should we have to regard all further technical progress as a calamity; we should have to regard all past technical progress with equal horror. Every day each of us in his own activity is engaged in trying to reduce the effort it requires to accomplish a given result. Each of us is trying to save his own labor, to economize the means required to achieve his ends. Every employer, small as well as large, seeks constantly to gain his results more economically and efficiently -- that is, by saving labor....Why should freight be carried from Chicago to New York by railroad when we could employ enormously more men, for example, to carry it all on their backs?....Yet it is a misconception to think of the function or result of machines as primarily one of creating jobs. The real result of the machine is to increase production, to raise the standard of living, to increase economic welfare. It is no trick to employ everybody....Full employment -- very full employment; long, weary, back-breaking employment -- is characteristic of precisely the nations that are most retarded industrially. Where full employment already exists, new machines, inventions and discoveries cannot -- until there has been time for an increase in population -- bring more employment. They are likely to bring more unemployment (but this time I am speaking of voluntary and not involuntary unemployment) because people can

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now afford to work fewer hours, while children and the overaged no longer need to work.” (pp. 54, 58). [In short, the fallacious fear about technology would logically lead us back to the grass hut era -- who really wants to do that? So his argument meshes with c...